IFRS Standards

Set of accounting standards governing international financial reporting

IFRS stands for International Financial Reporting Standards, which consists of a set of rules and standards. These standards bring transparency by providing high-quality and comparable information. This helps investors to make more informed investment decisions. 

This improves accountability by helping to reduce the information gap between those on the inside of a company and those on the outside. This allows investors and others to hold company management to account. 

This helps companies and markets operate more efficiently by having a single trusted global standard for financial information.

What are Accounting Standards?

Financial reporting standards are needed to provide consistency by narrowing the range of acceptable responses. In addition, reporting standards ensure that transactions are recorded by firms similarly, making them more comparable. 

Financial reporting provides important inputs for valuation purposes. Financial statements are presented in conformity with accounting standards issued by standard-setting bodies, ensuring high-quality financial reporting.

Currently, there are two primary accounting standard-setting bodies - International Accounting Standards Board - IFRS Foundation  (IASB) and the Financial Accounting Standards Board (FASB).  

There are more than 130 countries that follow norms referred to as "International Financial Reporting Standards" determined by the IASB. 

The IASB is headquartered in London, with its 15 board members drawn from around the world. 

Most companies in the United States follow standards issued by the FASB, referred to as generally accepted accounting principles (GAAP).  

History

The mission of the IASB is to develop IFRS that bring accountability, efficiency, and transparency to financial markets around the world.

They seek to serve the public interest by fostering trust, growth, and long-term stability in the global economy

In 1973, the International Accounting Standards Committee (IASC) - IAS Plus (IASC) was formed by accounting bodies of developed countries such as Australia, Canada, France, Germany, Japan, the UK, USA. 

The IASC issued standards known as "International Accounting Standards" (IAS). It issued almost 41 accounting standards, ranging from IAS 1 to IAS 41. This committee was dissolved in 2001.

A new body called the International Accounting Standards Board (IASB) was created as its successor. The International Accounting Standards Board (IASB) is now an independent standard-setting board of the IFRS Foundation.

The International Accounting Standards Board (IASB) issues International Financial Reporting accounting standards. 

The International Accounting Standards Board (IASB) passed a resolution after its formation that the previously issued standards called International Accounting Standards (IAS) could form part of International Financial Reporting Standards until they are withdrawn.

Measurement Principles

International Financial Reporting Standards have two measurement principles, the Historical Cost principle, and the fair value principle. Relevance and faithful representation of information are important.

Scale weighing money

Historical Cost Principle 

Historical cost is the cost at which the value of an asset is recorded at its original cost. It is the initial amount that the company originally paid when it acquired the asset.

By using historical cost methods, we can prevent the overvaluation of an asset, which takes place due to volatile market conditions during asset appreciation. Overvalued assets are assets whose current price does not match their earnings outlook, i.e., P/E ratio, and it is expected that prices will fall more in the future.

Fair Value Principle

The fair value principle states that assets and liabilities should be measured at the current market value. Fair value refers to the amount at which an asset could be sold (or that liability could be settled for) that is fair to both buyer and seller. 

The information obtained from fair value may be more valuable than the historical cost for certain types of assets and liabilities.

For example, certain investment securities are reported at fair value because market value information is usually readily available for these types of assets. 

In determining which measurement principle to use, companies weigh the factual nature of cost figures versus the relevance of fair value.

In general, although IFRS allows companies to revalue property, plant, equipment, and other long-lived assets to fair value, most companies choose to use cost. Companies choose the cost model to reduce the political burden company have to bear.

Only in situations where assets are actively traded, such as investment securities, do companies apply the fair value principle extensively.

Differences

Differences exist between IAS & IFRS and GAAP & IFRS, let's explain a few of them: 

1. IAS & IFRS

IAS generally stands for International Accounting Standards, whereas IFRS stands for International Financial Reporting Standards. 

IAS Standards

The IAS was published between 1973 and 2001, and the IFRS was published after 2001.

The IAS Standards were issued by the IAS Committee, whereas the International Accounting Standards Board issued the standards of IFRS.

There are a total of 41 IAS and 9 IFRS standards. 

The IAS does not contain rules regarding identifying, measuring, presenting, and disclosing all non-current assets for sale.

The International Financial Reporting Standards contain rules regarding identifying, measuring, presenting, and disclosing all non-current assets for sale.

When contradiction arises, the principles of IAS are dropped, whereas the principles of IFRS are taken into consideration.

Both International Accounting Standards and International Financial Reporting Standards are the same things. However, international Accounting Standards comprise old accounting standards, whereas International Financial Reporting Standards comprise new accounting standards.

Both set guidelines for businesses to help them record and maintain their financial statements and maintain transparency, accuracy, and efficiency in their financial statements. 

2. GAAP & IFRS

GAAP stands for "Generally Accepted Accounting Principles."

GAAP Standards

US GAAP is formulated by FASB. IASB's International Financial Reporting Standards were developed by IASB.

Under Generally Accepted Accounting Principles, comprehensive income can be a part of the statement of shareholders' equity.

Under International Financial Reporting Standards, comprehensive income can be reported separately or combined with the income statement and other comprehensive income.

Upward revaluation of assets is generally not allowed in Generally Accepted Accounting Principles, while it is mainly allowed in International Financial Reporting Standards.

Under Generally Accepted Accounting Principles, an auditor must express an opinion on internal control. However, no such internal control is regulated under International Financial Reporting Standards.

IFRS uses the First in, First out (FIFO) method in their treatment of inventory, whereas GAAP uses FIFO as well as Last in, First out (LIFO) for the treatment of inventories.

Which is better?

International Financial Reporting Standards are more principles-based, while GAAP is rules-based so some people could be more attracted to the principles as it captures the essence of a transaction more accurately.

However, since the majority of the world uses the International Financial Reporting Standards, convergence to the International Financial Reporting Standards could have advantages for international corporations and investors.

General Features of IFRS Standards

The following bullets state the general features you should know:

  • The application should be fairly presented. Fair presentation signifies the faithful representation of the effects of transactions, other events, and conditions according to the definitions and recognition criteria for assets, liabilities, income, and expenses set out in the framework.
  • All financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading. The facts and rationale should be disclosed if it is not presented on a going concern basis.
  • The accrual basis of accounting should be used for preparing financial statements (except for cash flow information).
  • Materiality means the financial statements should be free of misstatements or omissions that could influence the decisions of users of financial statements.
  • Aggregation of similar items and separation of dissimilar items.
  • No offsetting of assets against liabilities or income against expenses unless a specific standard permits or requires it.
  •  Financial statements should be prepared at least annually. The frequency of reporting should be maintained. 
  • Comparative information must be included in financial statements from previous years. Comparative information obtained from prior periods is disclosed for all amounts reported in the financial statements unless international financial reporting standards require or permit otherwise.

Requirements

IFRS financial statements consist of:

  • A statement of financial position (balance sheet)
  • A statement of comprehensive income (a single statement of comprehensive income or two statements, an income statement and a statement of comprehensive income that begins with profit or loss from the income statement)
  • A statement of changes in equity, separately showing changes in equity resulting from profit or loss, each item of other comprehensive income, and transactions with owners in their capacity as owners
  • A statement of cash flows
  • Notes comprising a summary of significant accounting policies and other explanatory notes that disclose information required by IFRS but not presented elsewhere and that provide information relevant to an understanding of the financial statements

Entities are encouraged to furnish other related financial and non-financial information in addition to the required information. However, financial statements must fairly present an entity's financial position, financial performance, and cash flows.

Structure and content of financial statements

  • Most entities present a classified balance sheet showing current and non-current assets and liabilities.
  • Minimum information is required on the face of each financial statement and in the notes.
  • Comparative information for prior periods is to be included unless specific standards state otherwise.
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Researched and authored by Payal Sarkar | LinkedIn

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